Volume 2, Issue 12

FLC Revisited

The FLC has seven steps, which are Budgeting, Protection, Savings and Debt Reduction, Accumulation, Preservation, Distribution, and Transference. In this article we will discuss the last three phases of the FLC.

Preserving Your Capital

According to Investopedia the “Preservation of Capital” is defined as, “An investment strategy whose primary goal is to prevent the loss of an investment's total value.” From an investment perspective this is accomplished by rebalancing one’s investment portfolio through the use of asset allocation. Asset allocation is a modern portfolio theory where the investor balances the three main asset classes, stocks, bonds, and cash equivalents based on the amount of risk one is willing assume. The risk assumed is also based on when the investor will need the money. In other words, the sooner the investor needs the money the more conservative the portfolio needs to be! As the investor approaches retirement they usually keep all three asset classes in their portfolio at and during retirement. However, according to CNN Money, "The old rule of thumb used to be that you should subtract your age from 100 - and that's the percentage of your portfolio that you should keep in stocks.” For example, if you are 37, you should keep 63% of your portfolio in stocks. If you are 67, the average age of an American retiree, you should keep 33% of your portfolio in stocks. In addition, this same 67 year old investor would most likely have about 37% of their money in cash equivalents (CD’s, money market accounts, etc…) and the rest (ie. 30%) in bonds. If you have noticed this particular 67 year old investor still has stocks in their portfolio. Stocks are necessary to protect the investor from inflation. According to inflationdata.com, “The average inflation rate for the entire period since 1913 has been 3.41% per year.” Always having the right mix of domestic and international stocks in your portfolio will allow your money to keep pace with the value of the dollar bill and other international currencies.

The Leaky Faucet

Many people have leaky faucets at home. Just as you do not want a leaky faucet in your home to run out of water the main objective in the Distribution Phase is to “not” have your income streams run out of money! Since your human capital is zero at this point you are “totally” relying on your financial assets. In other words, since you are unable to work your job is to optimize all of your income streams (retirement accounts, social security, etc…). According to Wikipedia the average life expectancy in North America is nearly 80 years of age, which equates to about 13 years of living in retirement. However, most financial planners create plans that account for a 30 year life expectancy or until the client is 97 years old. Using a 30 year life expectancy, Certified Financial Planner (CFP©) William Bengnen, states an annual withdrawal rate of 4.15%, “will sustain at least 30 years of retirement for stock allocations ranging from 40 to 70 percent.”

Leaving a Legacy

We have covered the Transference Phase in a special edition article, but it is about Estate Planning. People equate Estate Planning “only” to the rich, but this cannot be much further from the truth! An estate is nothing more than a collection of financial and non-financial assets. The two types of Estate Planning are Estate Enhancement and Estate Liquidity. Estate Enhance are for most people which is about creating an estate. This is usually accomplished by acquiring Life Insurance. Estate Liquidity is Estate Planning for wealthy individuals. The objective is to reduce as much gift and estate taxes as possible! When one dies with an estate over a certain value ($3.5 million in 2009) they can be taxed in upwards of 50% of the value of their estate assets. Leaving a legacy is important for most families and an estate can significantly help the next generation finance their life endeavors (eg. higher education) without acquiring loans.

Financially Ever-After

This year has been a challenge for the global economy at large, from Wall Street to Main Street. But, now is the time to plan for your financial future and according to most conventional wisdom you will “not” be disappointed with the outcome! We wish you the best in your financially ever-after dreams coming true. Happy New Year! Know the FACTS!